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View Full Version : Poliwag2 Vs The Big Al: Free market economics.



Rave
28th May 2008, 5:47 AM
One on one debate against the 2 mentioned users above.

Same old rules apply. Anyone that isn't the users will be infracted for spam and will have their post deleted.

Poliwag2
28th May 2008, 9:21 PM
Stance

The free market is inherently more efficient than any alternative method of resource allocation.

How a free market works

With the price mechanism; a free market harnesses demand and supply forces to allocate resources. Intuitively, demand is decreasing in price and supply is increasing in price. More precisely, at a relatively high price; fewer consumers will be willing to buy and more producers will be willing to sell, and vice-versa at a relatively low price.

At equilibrium (demand = supply) in its purest form, resource allocation is socially optimal. That is, everyone who wants to consume at a given price, is able to consume; and there is no excess supply (waste). Equilibrium is not stationary, but in the long run, the economy maintains equilibrium (i.e. the market clears over time as e.g. firms lower prices to dispose of their inventory). This equilibrium price is representative of value, and the scarcity of resources.

The free market will allocate resources optimally if...

1) Resources are finite and wants are infinite
Although subject to the law of diminishing returns, consuming an extra unit of a normal good will always give positive utility (enjoyment). Therefore, we will never be satiated, but consumption is subject to a constraint.

2) Price = value
The expected price of any good is an unbiased estimator of real value and distributed normally. The price of a product is equal to the mean (median if there are many outliers) of a given population's estimation of value.

3) There are many buyers and sellers
The expected price becomes arbitrarily close to real value as the number of buyers and sellers tends to infinity (the law of averages). Competition between producers provides a better/cheaper product.

4) Property rights are enforced
Property rights give an incentive for people to act socially optimally, because it distributes responsibility.

5) Information symmetry
Important to allow people to act both rationally and optimally, and increasingly a realistic assumption with the advent of the internet.

6) Agents act rationally
People look to maximise their private benefit. Rationality is acting optimally given an information set.

These are the ideal conditions for a free market. In a developed country, all are plausible to varying degrees. 1), 2) and 6) are assumed to be true.

Implications of the free market

1) Small government - exists to enforce rights, namely property rights.
2) Low taxation - to fund public goods that a market cannot provide i.e. fire service, law and order, primary schooling, means tested scholarships, infrastructure and defense.
3) No welfare state - why should one exist?
4) On a global scale, leads to efficient specialisation

Market failure and the case for intervention

There are instances where the market will fail. However, this is never due to the price mechanism per se, but a shortcoming of one of the above conditions (if you wish, I can demonstrate any of the below with a model or mathematically):

1) In the case of externalities e.g. the absence of property rights regarding air, nobody is responsible for it. Therefore, air pollution is an external cost not accounted for by the price mechanism (people only care about the cost to themselves). An ad valorem tax will "internalise" the cost to society. Similarly, education has an external benefit, and a subsidy or scholarship programme will correct for the failure.

2) In the case of a natural monopoly (or monopsony), e.g. utilities, an absence of competition leads to welfare loss. Here, regulation is necessary to improve efficiency. Monopolies in potentially competitive industries are not a long term issue as long as there are no barriers to entry for new firms.

3) In the case of information asymmetry, that is a legislative issue. Regulation may be necessary to enforce transparency within e.g. the financial industry.

The case against intervention

Other than the instances (or variations on a theme) listed above, intervention is invariably undesirable. There are three types of market:

1) The goods market
Intervention here takes the form of taxation/subsidies or tariffs/quotas. All are distortions that lead to inefficient levels of output. Consider agricultural subsidies; this leads to oversupply and worse, buffers against the effect of competition. Consider import quotas that protect domestic industry, at the cost to the consumer and global welfare.

2) The labour market
Within a functioning free market system, it is literally impossible for anyone to be exploited. For example, a worker's value/wage is not arbitrary nor fixed, but determined by his/her productivity and demand from the labour market. Intervention here is most often a minimum wage. In places where the minimum wage is below market equilibrium, it has no effect. In places where it is above market equilibrium, it creates unemployment. The mechanism is as follows: a higher wage means firms face higher costs of production, and managers will only keep workers who justify the minimum wage. Anyone not productive enough is fired. Moreover, more economically inactive people will be willing to supply their labour for a higher wage, but demand has contracted. This process also creates structural inflation.

3) The money market
Intervention here means politically motivated money printing, usually to fund fiscal policy, creating an artificially low interest rate; thereby risking bubbles and stimulating inflation.

In summary

The free market is imperfect, but only because real world scenarios are imperfect. However, developed world conditions are becoming more and more favourable, and the free market is increasingly the most attractive option. The alternatives are government intervention and central planning. The latter represents the opposite extreme, which neither worked on paper nor in practice. Government intervention is fundamentally undermined by incentives. Governments have no direct incentive to improve efficiency (their priority is to remain in power). Therefore, they are prone to visible policies that attract voters (e.g. Labour buying computers for school), which will not necessarily benefit society (optimally). This leaves free markets as the most efficient method for allocating resources. It works on paper because it aknowledges that agents respond to incentives, and it works in practice as long as we allow it to.

The Big Al
28th May 2008, 11:44 PM
I think my opponent's post speaks to my argument very well. Modern economists make four assumptions that are inherently flawed.

-People will think and act rationally
-The world is homogeneous and everyone will play by the same rules
-The economy operates in a vacuum
-The economy does not have to handle human needs

My opponent even made this assumption that people must act rationally for the Free Market to work. This is where the completely Free Market like Communism on the other end. People do not think rationally. As the old saying goes "money talks and ******** walks".

People do not plan on how to maximize their benefits. They plan to maximize their profits (which is not the same thing as I will explain). As far as they are concerned money is all that matters and the rest be damned.

There are many factors that make up benefit. While profit is one, it is not all. These include:

-Sustainability: The ability to maintain the benefits for the maximum amount of time possible. The longer you can maintain the benefit, the more you get in the long run.
-Usefulness: How this benefit works for you. Having the benefit is not enough. It has to serve some purpose for you or else it's not a benefit.
-Availability: How many people can access this benefit. The more people receiving this benefit, the more benefit is out there and being circulated.

There are other factors but I think that covers the majority of the benefit.

The problem with today's society is the emphasis placed on profits many times at the expense of the other factors. Longterm, widely received benefits are tossed aside for quick profits for the few. Even though this could ultimately cost even these few recipients in the long run.

And he also assumes the world is exactly alike. Economics has no borders and is the same no matter where you are. This is yet another flawed assumption.

Throughout the world ethical standards are different. Therefore the treatment of your fellow man varies. Unfortunately, when added to the Free Market and most unethical always wins.

The price mechanism is formed by a combination of the cost of production and the acceptable price. However, if a country employs forced labor the cost of production is reduced. Because the forced labor has close to no purchasing power the acceptable price for goods causing it to decline as well. So the equilibrium falls and edges out production from countries that observe labor rights and pay a living wage simply because they can't match the unnatural price.

This is where government intervention comes in. Tariffs serve the purpose of equalizing the cost to produce regardless of labor practices. With the benefits of dubious labor practices negated, the market would dictate they would abolished. This increases the global purchasing power and therefore the equilibrium price.

Used properly tariffs can serve to stabilize the economy keeping the equilibrium price within natural limits. The key word is properly. They should only be used to equalize the cost of production, not for the express purpose of protecting domestic markets. Besides, with proper use the domestic markets will benefit regardless.

Another flawed assumption is that the economy works in a vacuum. It does not.

Perhaps the best case proving that it is not is war. Say I have 100 tonnes of steel. I have two choices. I can turn it into railroad tracks or bomb casings. The railroad tracks will be used again and again and serve a purpose in the economy. The bomb casings will be expended after one use.

War removes resources from the market. This drives up the equilibrium price. That's why when the equilibrium price should be falling and yet it's rising.

Economists also tend to ignore the economy not being run by soulless drones but human beings. Humans will not accept someone telling them that they're services are not conducive to a free market economy. If driven into enough desperation they'll grab they're gun and start fighting. The French and Russians can testify to that with tragic results. So any economy has to address human needs in someway.

Now the real question comes in this argument against total free market economics. To what degree should government should intervene?

First of all, I don't support Communism. As I said in the beginning it fails as much as a total free market. It requires 100% of the people to be 100% honest and self-sacrificing 100% of the time. That's never going to happen like people thinking 100% rationally 100% of the time.

So a happy medium must be reached.

The government's most useful roll is probably relieving pressures exerted on it simply from the fact we're human. Namely, education and health care. Both are costs of labor yet they do not serve any real benefit to the market. The government can provide both at cost and if done correctly efficiently. If anything, it helps the free market be more free.

Outside of that and the more global effort to keep the changes in the equilibrium price manageable and natural to prevent a detriment to local markets government should stay out of the way. The government shouldn't do anything to effect growth or progress. After providing a green pasture of a stable market and a healthy and well educated work force the governments roll is done.

In conclusion. The economy is not as cut and dry as current academia suggests simply because it's run by humans. Humans are imperfect and need some ground rules and certain services which is the extent the government should be involved. Afterwards the Free Market can take care of itself.

Poliwag2
29th May 2008, 1:20 AM
You make a bold statement which is unfounded.

Notice that I cited rationality as an ideal condition. Of course, people are neither homogenous nor do they necessarily act rationally all the time in reality. However, for all intents and purposes (and to keep the model simple), it is plausible to assume that agents are indeed rational. An element of irrationality does not invalidate the model, it merely reduces the relative clarity of the outcome. Rationality is assumed to give a clear indication for the mechanisms at work.

Neither are economic models operating in a vaccuum; just that everything else is held constant, for convenience. There is a key difference here. How else can one identify the effect of changing one variable? If you were to apply layer upon layer of an infinite number of reasonable simultaneous factors at work, how can you isolate a causal effect amid all the background noise?

Please clarify this point: "the economy does not have to handle human needs". If I interpret correctly, you suggest that the economy does not exist to satiate human needs. This is alarming if you think so, and if so, I am wasting my time typing this.

I assumed rationality to make the free market work efficiently; that is, ideally. An element of irrationality does not detract from the model. Please understand what I typed, not what you think I typed. I think you will find that people do act rationally the vast majority of the time (if not all of the time). (Sub)conciously, within every decision you make, you consider the relative payoffs of one choice against another, given all of the information available to you. Your choice is almost invariably optimal, and that is the definition of rationality. I also fail do see the parallel with communist central planning. Do you actually know how the mechanism behind central planning...

Profits is a monetary representation of benefit, in the same way that price is a representation of value. You see, it is possible to put a monetary value to all of those benefits you cited. Money is the perfect medium. This does not detract from the argument. Yes, short-termism is a problem, but it is 1) besides the point and 2) rational if the agent is particularly impatient (i.e. he value cake today much more than two cakes tomorrow).

The world has the potential to be exactly alike... an economic model works anywhere given the necessary correct conditions. What is your point here. Why do ethical standards even matter? Forced labour?... that would not be a free market; the two are mutually exclusive.

Am I correct in interpreting that you justify tariffs with a normative argument founded on unethical labour practices abroad? Firstly, to suggest these practices are commonplace is mistaken. Secondly, the point is neither here nor there because consumers benefit from cheap imports (the same consumers complaining about inflation). Thirdly, tariffs exist to protect domestic industry (which are implicitly iuncompetitive if said tariffs exist), not to wage an ethical war, end of. The UN can intervene with embargoes to achieve that end. "This increases the global purchasing power and therefore the equilibrium price" ... I am not sure how you jump to this. To be honest, the entire post is quite non-linear and illogical.

"Used properly tariffs can serve to stabilize the economy keeping the equilibrium price within natural limits. The key word is properly." You are making this up as you go along. What is this jibberish you are trying to pass off as constructive... Where do I begin with this? What does "properly" mean for a start, how does a tariff keep "equilibrium price within natural limits"? And what are these "natural limits"? If you mean (which I doubt) tariffs encourage domestic industrial growth (ergo stability), fair enough. However, tariffs increase the equilibrium price; it works in the same way as a tax...

Regarding the trade off between bombs and railroads; what is the relevence?? There are infinite trade offs between capital goods and consumer goods, both options with a need. It is interesting to note that governments are the agents who allocate defense spending... not the free market.

"War removes resources from the market. This drives up the equilibrium price." Finally a bit of sense! I am happy to agree with this point in isolation.

"Blah blah blah... so any economy has to address human needs in someway" ... wait, did you not earlier state "the economy does not have to handle human needs".

"Now the real question ... [is] To what degree should government should intervene?... So a happy medium must be reached." I agree absolutely, and I listed all the scenarios where the government should intervene.

"Communism... fails as much as a total free market. It requires 100% of the people to be 100% honest and self-sacrificing 100% of the time. That's never going to happen like people thinking 100% rationally 100% of the time." It does not! you read what you want to read, that is your problem, sir. You look at the page, and instead of reading, words form in your mind that satisfy a conclusion you have already (mistakenly) reached. This is frustrating beyond belief.


The government's most useful roll is probably relieving pressures exerted on it simply from the fact we're human. Namely, education and health care. Both are costs of labor yet they do not serve any real benefit to the market. The government can provide both at cost and if done correctly efficiently. If anything, it helps the free market be more free.

Outside of that and the more global effort to keep the changes in the equilibrium price manageable and natural to prevent a detriment to local markets government should stay out of the way. The government shouldn't do anything to effect growth or progress. After providing a green pasture of a stable market and a healthy and well educated work force the governments roll is done.

I read the above two paragraphs, but lost the will to correct you. I am sure my words will fall on deaf ears anyway.


Humans are imperfect and need some ground rules and certain services which is the extent the government should be involved.

For example... humans respond to incentives... oh FFS, it is not worth it.

Before your response, I was willing to give you the benefit of the doubt and take this seriously, but this is ridiculous... I have to ask; are you a troll? You do not know what you are talking about! At least I afforded you the courtesy of reading and understanding your post, which you clearly failed to do with mine. I can only conclude this thread was/is a waste of my time. Your post is drivel, digressive, normative, waffly, unconstructive and highly biased by your deep rooted belief that the field of economics is bollocks.

You display little or no understanding of the subject matter and yet posture as if you wrote the book on free markets and why they fail. It should not require so much effort for me to try and weasel out a single point you have made with any value. As far as I am concerned, I will not post another reply in this thread. It would be irrational and a waste of my time. You are welcome to the last word, but after that, please can a moderator close this.

The Big Al
29th May 2008, 2:18 AM
And I thought I was going to have a thoughtful debate. Instead I find myself arguing with an *******. You clearly missed (or ignored) my point. My point is this if you can't understand it. Total Free Market Economics cannot, will not, and shall not exist in the real world as an effective economic plan. Your points are not applicable to the real world. That's what I'm getting at.

And you personally insulted me. You are the one who is a troll.

But I'm the bigger man. I'm still willing to continue this debate in intelligently. Why is beyond me.